The bull market in equities is aging but remains very much intact...
For more than a year now, equity markets have enjoyed an unusual combination of low volatility and near-uninterrupted price gains due to a combination of accelerating economic growth, improving earnings, accommodative monetary policy and still-low inflation.
Economic growth should continue to improve, but expectations have risen, which means positive surprises will be harder to come by. At the same time, central bank policy is slowly tightening, which could contribute to market volatility. Additionally, accelerating growth and tighter policy may finally trigger an uptick in inflation, especially in wage inflation given the low level of unemployment. Should this occur, we expect bond yields will climb, which could jolt other financial assets including equity markets. We don’t expect yields to rise unimpeded, but an ascending period of peaks and troughs looks likely.
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Weekly Top Themes:
We expect a tax bill to be passed in 2018, which should help the economy and equity markets. While there are significant differences between the two plans, the simple reality is that it would be political suicide for Republicans if they don’t pass tax reform before next year’s elections. Depending on the details of the final bill, we expect individual tax cuts to be a plus for consumption, while repatriation and corporate tax cuts should contribute to corporate revenues and earnings.
Despite some views to the contrary, we believe the global economy should continue to improve. Some argue the world is in a period of secular stagnation. After all, growth remains very slow despite years of low or even negative interest rates. In our view, the world economy is enjoying a period of reflation and should experience more synchronized growth in 2018.
The bull market in equities is aging but remains very much intact. The current bull market is closing in on nine years, which makes it natural to ask how much longer it can continue. In our experience, there are several reasons for a bull market to end, including advanced Federal Reserve tightening, the flattening of the yield curve, slower levels of money growth, widening credit spreads and rising inflation. We are watching these factors closely, and don’t see signals yet that would point to the end of the current run.
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